Solutions to Welfare

•Are Canadians Less Compassionate then Americans?

•Welfare Reform, California-Style

•Welfare Rates

•Fighting Welfare Fraud

Contents                April 1996

Editor's Notes
This Issue's Authors
Are Canadians Less Compassionate than Americans?
Welfare Reform, California Style
Welfare Rates
Fighting Welfare Fraud
Revamping Canada Post
Budget outKleins Klein
Breathe Deeply ... Another Unfunded Pension Liability
A Community of Communities
There's Money in Them Thar Numbers
Letters

Editor's Notes

Canadians are doing a lot of soul-searching about the social safety net in the late 1990s. Generally, we want those who are truly disadvantaged, or who are facing some crisis for which they are completely unprepared, to have a helping hand. But at the same time, we don't want a big chunk of the fruits of our own labour to be taken from us by government in order to be carelessly handed out, without much examination, to anyone who is too indolent or insolent to keep a job. We want governments to be more accountable for how they spend our hard-earned money.

In the April issue of Fraser Forum, experts from Canada and the U.S. examine social assistance payments in some depth. Are welfare payments high enough? Are they too high? How do the U.S. states compare with Canadian provinces in the welfare benefits they dispense? What can and should be done about welfare fraud, and just how big is the problem anyway?

The money that governments tax from us should be enough to pay for all the programs that help the less fortunate in our society. This issue of Forum begins to explain how that money can be used most effectively.

This Issue's Authors

Gordon Davies is Senior Research Economist at The Fraser Institute. He earned his Ph.D. in Economics from the University of Michigan.

Joel Emes has his Masters in Economics from Simon Fraser University. He is a research economist at The Fraser Institute.

Owen Lippert is Senior Policy Analyst at The Fraser Institute. He received his Ph.D. in History from the University of Notre Dame, Indiana.

Kristin McCahon is Director of Publication Production at The Fraser Institute. She has her M.A. in English Literature from the University of British Columbia.

Lydia Miljan is Director of the National Media Archive, a division of The Fraser Institute. She earned an M.A. in Communications from the University of Calgary. She researches and writes On Balance.

Kate Morrison is Co-ordinator of the National Media Archive. She has a B.A. (Honours) in Economics and Communications from Simon Fraser University.

Filip Palda is Professor at l'École Nationale d'Administration Publique in Montreal, and Senior Fellow of The Fraser Institute. He is the author, co-author, or editor of several Institute books and publications. He received his Ph.D. in Economics from the University of Chicago.

John Robson is a freelance writer based in Ottawa. He has his Ph.D. in History from the University of Texas at Austin. He has written several Critical Issues Bulletins and many articles in Fraser Forum.

Christopher Sarlo is Associate Professor of Economics at Nipissing University in North Bay, Ontario. He is the author of Poverty in Canada, published by The Fraser Institute. He earned his Ph.D. in Economics at Queen's University.

Michael Walker is Executive Director of The Fraser Institute. He received his Ph.D. in Economics from the University of Western Ontario. He has written, edited, or co-authored dozens of Fraser Institute publications.

Are Canadians Less Compassionate than Americans?

Michael Walker and Joel Emes

The Fraser Institute has long been interested in the adequacy of the welfare support system and the extent to which it may be inducing people at the margin to make choices that are neither beneficial for them nor for the long-term interests of society. In this regard, we have published special studies of welfare in British Columbia and in Alberta, we have looked carefully at the support payment system in Ontario, and we have published a Basic Necessities Index. The Basic Necessities Index, published in our study Poverty in Canada by Christopher Sarlo, attempts to fix a lower bound on the amount of support required on an ongoing annual basis to provide individuals in different circumstances with an income level sufficient to afford the basic needs of clothing, shelter and food.

Misinformation plagues poverty discussion

One of the most interesting findings of the research we have conducted on welfare in Canada has been the extent to which we have discovered misinformation accepted as fact. As was pointed out in a special edition of On Balance, the publication of the National Media Archive, reporting on poverty frequently involves the simple invention of numbers which have no basis in fact.  The National Media Archive, On Balance, vol 7. no. 8. -Note   Even when this is not the case, reporting sometimes relies on information that is not intended for the purpose for which it is used. For example, the poverty line estimates used by the media in Canada are, for the most part, the low-income cutoff lines established by Statistics Canada. These lines are used as poverty lines in spite of the fact that Statistics Canada has repeatedly warned that they are not appropriate to be used for that purpose.

Our images of poverty come largely from television, and television coverage of the poor is distorted. Whereas Statistics Canada finds that more than 60 percent of poor families are headed by males, the On Balance study showed that 100 percent of the coverage of poor families on both CBC and CTV consisted of coverage of single-parent, female-headed families.

There is also disproportionate coverage of poverty in the regions. Whereas Statistics Canada finds a higher incidence of poverty in Quebec, the Atlantic provinces, and the Prairies, television coverage of poverty was more likely to be from Ontario than any other province, and coverage of poverty in Quebec was virtually non-existent.

The myth of Canada as a kinder and gentler place

One theme that comes through loud and clear in coverage of poverty issues in Canada is the extent to which Canada behaves differently than the United States with regard to the help provided to those in need. The then-leader of the federal New Democratic Party was given a platform on CBC's “National” on July 5, 1988, in the debate about free trade to state his view about the kinds of attitudes that prevail on each side of the Canada-U.S. border. As Mr. Broadbent put it: “They may want that kind of America, with the rich getting richer and the poor poorer, but we reject that, I'll tell you. We have no intention, Madam Speaker, of turning this country into that kind of social and economic wasteland for the majority of the people.” The National Media Archive, On Balance, vol 2. no. 8 (September 1989), p. 3. -Note

Mr. Broadbent was undoubtedly espousing a popular sentiment when he so depicted the attitude towards the poor in the United States. In fact, it would be possible to find thousands of quotes by distinguished people who have intimated that the main problem in forming a closer trade relationship with the United States is that the result would be a kind of averaging down of social programs toward the U.S. level, one which Canadians would not find attractive, given our “kinder and gentler” approach to life.

There is, of course, a central question as to how you would judge the extent of kindness and gentleness that might be manifest in a welfare system. One measure that suggests itself is the level of benefits made available to citizens of a country.

Comparing welfare support in Canada and the United States

In this paper, we examine the welfare systems of Canada and the United States by comparing the support levels available in the two countries. This research demonstrates very clearly that, as with many social policy issues, casual impressions about the comparative performance of Canada and the United States are misleading.

While both Canada and the United States have national programs that provide federally-financed support for those who need welfare, there are nevertheless vast differences within these countries as to the generosity of the payments made available to individuals in different circumstances. This can be readily seen in table 1.

What table 1 also shows is that many U.S. states have higher welfare support levels than any Canadian province. In fact, the most generous Canadian province is the twelfth most generous jurisdiction on the list. States such as Hawaii, Connecticut, New York, New Jersey, Massachusetts, and California all have welfare support levels which exceed those available in any Canadian province. And the differences are not trivial. Welfare support available in the state of New York ($24,804), which borders the highest-paying Canadian province—Ontario—pays 18.7 percent more to its single mothers with dependent children than is paid in Ontario ($20,899). The state of Hawaii, which tops the U.S. list at $32,593, exceeds Ontario by 56 percent.

While this will undoubtedly come as quite a shock to most Canadian observers, it is not the case that the lower support levels in Canada are inadequate. When we compare the Canadian support levels for this type of welfare—for a single parent with dependent children—with the Basic Necessities Index created by The Fraser Institute (table 3), we find that in every instance, support levels exceed the Basic Necessities Index level. Indeed, the least generous province, New Brunswick, which pays $15,714 per year, exceeds the Basic Necessities Index level of support by $2,095 dollars.

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. . . many U.S. states have higher welfare support levels than any Canadian province. In fact, the first Canadian province is the twelfth most generous jurisdiction on the list.

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But these data do throw into a cocked hat the notion that the difference between Canadians and Americans is that we are “kinder and gentler,” and have a higher regard for our fellow citizens than they do. Or is it that Americans living in the 11 states that pay higher benefits than the most generous province, including Hawaii, New York, Massachusetts, and California, are unrepresentative of Americans generally? But then we would have to ask the same question about the difference between Ontarians and residents of New Brunswick, since there are many U.S. states that provide levels of welfare support that lie between the levels provided by the Ontario government to its citizens, and the level provided by the government of New Brunswick to its citizens.

While a variation in compassion cannot be excluded as a possible explanation, there is a more plausible explanation. Chart 1 presents welfare support in the various provinces and states (in Canadian dollars) along with the per capita income there, ranked from highest to lowest. What is immediately evident from this chart is that jurisdictions that have high welfare support levels also have high per capita incomes. In fact, the scatter diagram presented as chart 2 confirms this impression. Irrespective of the country, the higher the per capita income in the province or state, the higher the welfare support provided by that province or state.

The inescapable conclusion from this analysis is that those who would like to see higher levels of welfare support made available to citizens ought to promote economic growth and development in their jurisdiction, not compassion! For while it has often been said that before you can redistribute wealth, you have to create it, these data show that, as a practical matter, wealth is not redistributed until it is created, and until income levels in a jurisdiction rise there is little interest in providing high levels of welfare.

Of course, that does not mean that raising the level of welfare is the right thing to do. In fact, considerable evidence cited elsewhere in this issue of Fraser Forum suggests just the opposite. One clear effect of raising welfare rates in the United States has been to increase the attractiveness of single parenthood—particularly for low income women and teenagers who find a more attractive economic offer available from the state than from the pool of prospective husbands from which they can realistically draw.

Welfare makes mothers a better offer than working

In her remarks reported elsewhere, Ms. Eloise Anderson, the Director of Social Services for the State of California—the ninth most generous jurisdiction in North America—notes that one of her ambitions is to ensure that the level of support for single parents is not greater than the opportunity they have in the marketplace. This she defined as the minimum wage the parents could earn if they were employed. For the most part, this is the minimum wage set by law, since many single parents do not have the skills that would enable them to earn more.

While such a standard seems harsh at first glimpse, Anderson maintains that it is the only fair way in which to proceed. Consider, she says, the low income working families who are making do on marginal jobs. Is it really fair to tax these individuals and give the proceeds to other families who are not working? On a pragmatic level, if the welfare paid to single parents exceeds what they can reasonably expect to earn in a job, they become permanently attracted to the welfare system.

As table 1 in this study shows, the annual wage available from welfare greatly exceeds the minimum wage in almost all of the jurisdictions in North America, including all of the Canadian provinces.

Summary of the research related to welfare rates and incomes

The following tables calculate the total income available to several categories of welfare recipients in Canada, and compare the income in one of these categories (a single parent with two children) to that for a similar category in each of the U.S. states and the District of Columbia. Table 1 shows the ranking for the provinces and the states. Since welfare is non-taxable in Canada and in the U.S., the pre-tax wage equivalent to this welfare income for this single parent is also calculated and presented in table 1. The question of adequacy is addressed by comparing the Canadian welfare incomes to the Basic Necessities Index (BNI)—the minimum amount that a family needs for food, clothing, and shelter.

Major findings

Since 1970, the number of people receiving Canada Assistance Plan (CAP) payments has increased from 1.35 million to 3.07 million (a 228 percent increase or a 8.8 percent annual increase).

Since 1970, CAP payments have increased from $2.03 billion (in 1995 dollars), to $7.95 billion (a 391 percent increase, or a 15 percent annual increase).

Eight out of 10 provinces have had significant increases in the number of recipients since 1990. Alberta has had a significant reduction in recipients since 1993.

A single parent would have to earn between $.95 and $3.45 above the minimum wage to have the same total annual income as a welfare recipient (except for Quebec, because of its parental wage allowance).

When Canadian welfare incomes are ranked from highest to lowest, Ontario is first for all four categories (single employable, single disabled, single parent with two children ages two and four, and employable couple with two children ages ten and twelve). British Columbia is second for three categories and is a close third for the fourth.

When ranked by amount over the Basic Necessities Index, Alberta is second highest (behind Ontario) for the disabled category.

Quebec has fewer CAP recipients than does Ontario (802,200 and 1,344,600 respectively) but receives more from Ottawa than does Ontario ($2,698,594 versus $2,576,238).

For the single employable category, five of the provinces do not meet the Basic Necessities line. Basic necessities are met in the other three categories for all provinces (except Nova Scotia for an employable couple). For the single parent category, the BNI is exceeded by at least $2,400 in all provinces.

When the states and provinces are ranked by total welfare income, 10 U.S. states are more generous than any Canadian province, 8 provinces lie in the lower half of the ranking, and the lowest ranked province is above only five of the states.

Methodology

Assumptions and calculations

This study assumes that all recipients are on Income Assistance (IA) for all of 1995, and that all singles and couples are employable. It also assumes that the employability of single parents is according to each provinces' definition. Furthermore, any rate changes in 1995 are incorporated in the calculation of total IA benefits.

Income Assistance benefits

Total annual IA benefits were calculated for four categories of recipient for a major city in each province. These categories are: Single Employable, Single Disabled, Single Parent with two children ages two and four, Couple with two children ages 10 and 12. Total annual IA includes the shelter allowance, basic IA, any allowed employment earnings, the child tax benefit, the GST rebate, any applicable provincial tax credits, any other amounts that recipients get automatically, Quebec's Parental Wage Allowance, and an estimate of the value of supplementary benefits.

Shelter allowance

Each province provides a shelter allowance up to a maximum to cover rent or mortgage payments. The amount varies by province and by recipient category. All recipients received the maximum shelter allowance in this study.

Basic income assistance

Each province also provides a “basic amount” to cover the costs of food, clothing, utilities, personal care, and household maintenance. This amount also varies by province and recipient category. All basic amounts in this study are those for a long-term recipient who is not participating in a work incentive program.

Exempt income

Earnings from employment, up to the point where benefits are reduced are included. Unemployment insurance deductions are not removed from this income as the “earned income” exemption is calculated as a net value (i.e., the exemption increases by the amount of required deductions).

Supplemental benefits

An estimate for the average benefits that are paid on a case-by-case basis at the discretion of the case worker is included. All provinces provide medical benefits, a prescription drug plan, and some dental and eye care. Other supplemental benefits include employment related expenses, damage deposits, moving costs to take a job, special diets, baby sitting, day care, telephone and utility deposits, re-connections and arrears, furniture and appliances, vehicle insurance and repairs, extraordinary transportation, and maternity clothing.

This list is not complete and coverage varies by province. A conservative estimate of $200 is added to the Single and Single Disabled categories and $400 to the Single Parent and Couple categories. These values are based on several estimates from the provinces. In 1995 dollars: Quebec (from 1981)—$465/recipient; Ontario (1987)—$486/family; Manitoba (1987)—$302/individual, $545/household; Alberta (1995/96)—$228/individual, $540/family of four. The estimates for Quebec and Manitoba come from Health and Welfare Canada, Evaluation of the Canada Assistance Plan (CAP), (Ottawa: Janauary 1991), p. III-43. The estimate for Ontario comes from Ernie S. Lightman, “Work Incentives and Disincentives in Ontario,” a 1987 report to the Ontario Social Assistance Review Committee. The Alberta figures come from Alberta Ministry of Family and Social Servies, Minstry Reform, 1993-1995. -Note

Child Tax Benefit

The Child Tax Benefit is paid to families with children under 18. The basic benefit is $1,020 per child over the age of six. A supplementary benefit of $213 per child is paid for children age six and under. This benefit varies in Alberta by the age of the child and in Quebec by the age of the child and the number of children in the family.

Goods and Services Tax Credit

The GSTC is a federal payment to offset the impact of the GST. It varies according to income and family size. Tables 3 through 6 list the annual benefits for each of the 4 categories.

Pre-tax wage equivalent

The pre-tax wage necessary to equal the total IA benefits for the single parent category are shown in table 7. All federal and provincial taxes and credits were included in the wage equivalent calculations. All values are according to 1995 provincial tax tables. An extra $500 is added to the child tax credit if most of the beneficiary's income comes from employment. The single parent in this study qualified for this extra amount.

Parental Wage Allowance

The Parental Wage Allowance is a subsidy paid to working parents in Quebec. It pays roughly 33 cents for every dollar of earned income and is phased out as income increases. It is funded through the tax system (not through CAP). A child care amount of up to $5,000 per child per year is also available through this program. The child care amount is paid every three months.

North American ranking

The Cato Institute's welfare incomes for the United States were combined with the welfare incomes for Canada.  Michael Tanner, S. Moore, and D. Hartman, “The Work vs. Welfare Trade-Off,” Policy Analysis, no. 240 (Sept. 1995). -Note   To make a comparison reasonable, the amount paid for Medicaid has been removed from the U.S. welfare and pre-tax wage equivalent amounts. The lower pre-tax wage equivalents were re-calculated based on the tax information provided in the Cato study. U.S. dollar values were converted to Canadian dollar values, and these combined incomes were then ranked. The results are in table 1.

Adequacy

The Basic Necessities Index (BNI) is a calculation of the minimum amounts of food, clothing, and shelter that a family or individual needs to survive. BNI values are compared to the total benefits package for each category of recipient in each province. The results are in tables 3 through 6.

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